SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended March 31, 1998

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from to

                           Commission File No.: 1-5270

                              SOFTNET SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

              New York                                 11-1817252
   --------------------------------        ---------------------------------
   (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

   520 Logue Avenue, Mountain View, California               94043
   -------------------------------------------          --------------
   (Address of principal executive offices)              (Zip Code)

Registrant's telephone number, including area code:  (650) 965-3700

                                 Not Applicable
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                    Yes X    No
                                       ---     ---

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

              Class                            Outstanding at April 30, 1998
  -------------------------------             --------------------------------
         Common stock, par                                7,570,796
       value $.01 per share                     

<PAGE>

                              SOFTNET SYSTEMS, INC.

                                      INDEX




PART I        FINANCIAL INFORMATION

     Item 1.  Financial Statements (Unaudited)

         Condensed Consolidated Balance Sheets
               March 31, 1998 and September 30, 1997

         Condensed Consolidated Statements of Operations
               for the Three Months and Six Months Ended
               March 31, 1998 and March 31, 1997

         Condensed Consolidated Statements of Cash Flows
               for the Three Months and Six Months Ended
               March 31, 1998 and March 31, 1997

         Notes to Condensed Consolidated Financial Statements
               

     Item 2.   Management's Discussion and Analysis of
               Financial Condition and Results of Operations


PART II       OTHER INFORMATION

     Item 2.   Changes in Securities

     Item 4.   Submission of Matters to a Vote of Security Holders

     Item 5.   Other Information 

     Item 6.   Exhibits and Reports on Form 8-K


<PAGE>



                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheets
                 As of December 31, 1997 and September 30, 1997
                        (In thousands, except share data)



                                                           Mar. 31,   Sept. 30,
                                                            1998        1997
                                                          ---------   ---------
                                                         (Unaudited)
       ASSETS

Current assets:
   Cash ................................................   $     17    $     37
   Accounts receivables, net ...........................      7,591       6,983
   Inventories .........................................      5,206       4,310
   Prepaid expenses ....................................        640         473
                                                           --------    --------
       Total current assets ............................     13,454      11,803

Property and equipment, net ............................      1,519       1,637
Costs in excess of fair value of net
  assets acquired, net .................................      6,309       6,900
Other assets ...........................................      3,988       4,037
                                                           --------    --------
                                                           $ 25,270    $ 24,377
                                                           ========    ========

       LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued expenses ...............   $  7,472    $  7,264
   Current portion of long term debt ...................      1,268       1,712
   Current portion of capital leases ...................         32          46
   Deferred revenue ....................................      1,141       1,479
                                                           --------    --------
       Total current liabilities .......................      9,913      10,501
                                                           --------    --------

Long term debt, net of current portion .................     11,886      11,747
                                                           --------    --------

Capital Lease obligation, net of current portion .......         84         101
                                                           --------    --------

Commitments and contingencies

Shareholders' equity:
   Preferred stock, $.01 par value,
       4 million shares authorized,
       Series A Convertible, 5,062.5 shares
       outstanding at March 31, 1998....................         --          --
   Common stock, $.01 par value,
       25 million shares authorized,
       7,014,673 and 6,870,559 shares
       outstanding, respectively .......................         70          69
   Capital in excess of par value ......................     39,391      34,379
   Accumulated deficit .................................    (36,074)    (32,420)
                                                           --------    --------
       Total shareholders' equity ......................      3,387       2,028
                                                           --------    --------
                                                           $ 25,270    $ 24,377
                                                           ========    ========







The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.

<PAGE>



                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                    CONDENSED CONSOLIDATED INCOME STATEMENTS
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                            Three Months Ended      Six Months Ended        
                                                                 March 31,               March 31,          
                                                          ---------------------   ---------------------     
                                                            1998         1997       1998         1997       
                                                          --------     --------   --------     --------     
<S>                                                       <C>          <C>        <C>          <C>          
Net sales ............................................    $  8,751     $ 10,174   $ 15,621     $ 20,952     
Cost of sales ........................................       5,946        6,192     11,049       12,840     
                                                          --------     --------   --------     --------     
   Gross profit ......................................       2,805        3,982      4,572        8,112     
                                                          --------     --------   --------     --------     
                                                                                                            
Operating expenses:                                                                                         
   Selling ...........................................       1,198        1,072      2,461        2,366     
   Engineering .......................................         643          564      1,225        1,114     
   General and administrative ........................       1,627        1,407      3,321        2,781     
   Amortization of goodwill and transaction costs ....         345          346        691          708     
                                                          --------     --------   --------     --------     
             Total operating expenses ................       3,813        3,389      7,698        6,969     
                                                          --------     --------   --------     --------     
                                                                                                            
   Income (loss) from operations .....................      (1,008)         593     (3,126)       1,143     
                                                                                                            
Interest expense .....................................        (268)        (320)      (596)        (576)    
Other income (expense) ...............................          63           10        131          (29)    
                                                          --------     --------   --------     --------     
                                                                                                            
   Income (loss) before income taxes .................      (1,213)         283     (3,591)         538     
                                                          --------     --------   --------     --------     
                                                                                                            
Provision for income taxes ...........................          --           --         --           --     
                                                          --------     --------   --------     --------     
   Net income (loss)..................................    $ (1,213)    $    283   $ (3,591)    $    538     
                                                          ========     ========   ========     ========     
                                                                                                            
Preferred dividends ..................................         (63)          --        (63)          --     
                                                          --------     --------   --------     --------     
   Net income (loss) applicable to common shares .....    $ (1,276)    $    283   $ (3,654)    $    538     
                                                          ========     ========   ========     ========     
                                                                                                            
Earnings(loss) per common share:                                                                            
   Basic .............................................    $  (0.18)    $   0.04   $  (0.52)    $   0.08     
                                                          ========     ========   ========     ========     
   Diluted ...........................................    $  (0.18)    $   0.04   $  (0.52)    $   0.08     
                                                          ========     ========   ========     ========     
</TABLE>

The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.

<PAGE>

                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                  (Unaudited)

                                                             Six Months Ended
                                                                  March 31,
                                                            --------------------
                                                              1998       1997   
                                                            --------   -------- 
Cash flows from operating activities:                                           
  Net income (loss) ....................................... $ (3,591)  $    538 
  Adjustments to reconcile net income (loss)                                    
    to net cash used by operating activities:                                   
       Depreciation and amortization ......................    1,086      1,132 
       Provision for bad debts ............................      172         15 
       Loss on disposition of net assets ..................       35         -- 
       Changes in operating assets                                              
         and liabilities:                                      
           Receivables ....................................      101     (4,525)
           Inventories ....................................     (578)       766 
           Prepaid expenses ...............................     (101)       157 
           Accounts payable and accrued expenses ..........      326        106 
           Deferred revenue ...............................     (338)       178 
                                                            --------   -------- 
             Net cash used in operating activities ........   (2,888)    (1,633)
                                                            --------   -------- 
                                                                                
Cash flows from investing activities:                                           
  Purchase of property and equipment ......................     (319)      (530)
  Additions to capitalized product design .................       --       (502)
  Decrease in other assets ................................       16          5 
                                                            --------   -------- 
             Net cash used by investing activities ........     (303)    (1,027)
                                                            --------   -------- 
                                                                                
Cash flows from financing activities:                                           
  Repayment of long-term debt .............................   (1,058)       (71)
  Borrowings under revolving credit note ..................    4,953      5,068 
  Payments under revolving credit note ....................   (5,434)    (2,547)
  Proceeds from sale of preferred stock ...................    4,600         -- 
  Proceeds from exercise of warrants  .....................      141         -- 
  Capitalized lease obligations paid ......................      (31)      (153)
                                                            --------   -------- 
             Net cash provided by financing activities ....    3,171      2,297 
                                                            --------   -------- 
                                                                                
Increase (decrease) in cash ...............................      (20)      (363)
Cash, beginning of period .................................       37        426 
                                                            --------   -------- 
Cash, end of period ....................................... $     17   $     63 
                                                            ========   ======== 
                                                                                
Cash paid during the period for:                                                
Interest ..................................................  $   671    $   504 
Income taxes ..............................................       --         -- 
                                                                                
                                                                                
Supplemental non-cash transactions                                              
Convertible debt issued for
  acquisition of equipment leases .........................  $ 1,444         -- 
Common stock issued for the
  conversion of subordinated notes ........................      210         -- 
Note received in sale of net assets .......................      110         -- 

The  accompanying  notes are an integral  part of these  condensed  consolidated
financial statements.
<PAGE>
                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
              Notes to Condensed Consolidated Financial Statements



1.   Basis of Presentation

The  financial  information,  except for the balance  sheet as of September  30,
1997,  included  herein is unaudited;  however,  such  information  reflects all
adjustments  (consisting  solely of normal recurring  adjustments) which are, in
the opinion of management,  necessary for a fair  presentation  of the condensed
consolidated  statements of financial  position,  results of operations and cash
flows as of and for the interim periods ended March 31, 1998 and 1997.

The Company's annual report on Form 10-K for the fiscal year ended September 30,
1997, as filed with the  Securities and Exchange  Commission,  should be read in
conjunction with the accompanying  condensed  consolidated financial statements.
The  condensed  consolidated  balance sheet as of September 30, 1997 was derived
from the Company's audited Consolidated Financial Statements.

The results of  operations  for the three  months and six months ended March 31,
1998 are based in part on estimates that may be subject to year-end  adjustments
and are not  necessarily  indicative  of the results to be expected for the full
year.


2.   Debt

Long-term debt is summarized as follows (in thousands):
                                                                             
                                                   March 31,    September 30,
                                                        1998             1997

         Bank Debt (See Note 3)                     $  7,949        $   9,026
         Convertible subordinated notes                4,858            3,624
         Other                                           347              809
                                                  ----------       ----------
                                                      13,154           13,459
         Less current portion                         (1,268)          (1,712)
                                                   ---------        ---------
                                                    $ 11,886         $ 11,747
                                                    ========         ========

On January 2, 1998, the Company  issued  $1,443,750  principal  amount of its 5%
Convertible  Subordinated Debentures due September 30, 2002 to a single investor
in exchange for the  assignment to the Company of certain  equipment  leases and
other  consideration.  The debentures are  convertible  into Common Stock of the
Company, at $8.25 per share, after December 31, 1998.

Subsequent to March 31, 1998,  the Company issued 120,000 shares of common stock
pursuant to the conversion of $810,000 of convertible debt by a single holder of
the Company's 9% convertible subordinated notes due September 15, 2000. These 9%
notes have a conversion price of $6.75 per share.


3.   Preferred Stock

On December  31, 1997,  the Company  sold 5,000  shares of Series A  Convertible
Preferred Stock,  $0.01 par value per share  ("Convertible  Preferred"),  for an
aggregate purchase price of $5 million. The Convertible  Preferred shares accrue
dividends at a rate of 5% per annum, payable quarterly, at the Company's option,
in cash or additional  Convertible  Preferred shares.  In addition,  the Company
issued  warrants to purchase  170,000  shares of the  Company's  common stock at
prices at or above the  market  price  (20,000  shares  at  $6.625  expiring  on
December 31, 2000 and 150,000 shares at $7.95 expiring on December 31, 2001). On
January 2, 1998,  the  Company  used the net  proceeds  of $4.6  million,  after
issuance costs of $400,000,  to reduce the balance of the bank revolving  credit
note.



<PAGE>

Each share of Convertible Preferred is convertible, at the option of the holder,
into the number of shares of common  stock as defined by the stated value of the
Convertible  Preferred  multiplied  by 5% per annum,  less any  dividends  paid,
divided by the conversion  price. The stated value of the Convertible  Preferred
is $1,000 per share and the conversion  price is the lower of $8.28 or a two day
average  market  price within a 20 day trading  period prior to the  conversion.
Pursuant to the Company's Articles of Incorporation,  as amended, the holders of
the Convertible  Preferred stock may only convert their outstanding  Convertible
Preferred  stock into an  aggregate  amount of common stock that does not exceed
19.99% of the  outstanding  common  stock of the Company.  Any excess  shares of
common  stock that are  issuable  upon  conversion  of  outstanding  Convertible
Preferred,  that  exceed  this  19.99%  limitation,  are  subject  to  mandatory
redemption  at the  option of the  holder of the  Convertible  Preferred  stock,
unless the  Company  either  obtains  stockholder  approval  for the  additional
conversions  over 20%,  or the  Company  receives  permission  to allow  such an
issuance from the American Stock Exchange. All outstanding shares of Convertible
Preferred, subject to the aforementioned restrictions,  automatically convert to
common stock on December 31, 2000.

Holders of Convertible  Preferred do not have voting rights,  except for certain
protective   provisions  relating  to  changes  in  the  rights  of  holders  of
Convertible  Preferred.  The Convertible Preferred ranks senior to the Company's
common stock as to  dividends,  distributions  and  distribution  of assets upon
liquidation, dissolution or winding up of the Company. The Convertible Preferred
is subject to mandatory  redemption  upon certain  circumstances,  including the
Company's (i) failure to convert the  Convertible  Preferred  when required (ii)
bankruptcy,  and (iii)  suspension  from trading on the American Stock Exchange.
The Company shall have the right to redeem the Convertible Preferred on or after
December 31, 1998 at a price equal to the greater of 130% of the stated value or
the market price  multiplied  by the number of shares of common stock into which
the Convertible Preferred can be converted.

On March 31, 1998, the Company  issued an additional  62.5 shares of Convertible
Preferred  as  payment  for  $62,500  of  earned  dividends  on the  outstanding
Convertible Preferred stock.

Subsequent  to March 31, 1998,  the Company  issued a combined  total of 299,946
shares  of common  stock,  pursuant  to the  conversion  of 2,000  shares of the
Company's  outstanding  Series  A  Convertible  Preferred  Stock.  The  Series A
Convertible  Preferred Stock,  including accrued  dividends,  was converted into
common shares at the conversion price of $6.69 per share.


4.   Stock Options and Warrants

Outstanding options and warrants to purchase shares of common stock at March 31,
1998 were as follows (in thousands, except price per option data):


         Outstanding at September 30, 1997                         1,435
              Granted at exercise prices 
                ranging from $6.625 to $7.95 per share               862
              Canceled                                               (18)
              Exercised at exercise prices 
                ranging from $1.75 to $5.313 per share              (103)
         Outstanding at March 31, 1998                             2,176
                                                                 =======

<PAGE>

5.   Earnings (Loss) per Share

The Company adopted Statement of Financial  Accounting  Standard (SFAS) No. 128,
"Earnings Per Share," in the quarter ended December 31, 1997.  SFAS 128 requires
the computation of basic and diluted  earnings per share.  Basic earnings (loss)
per common share is computed using the weighted  average number of common shares
outstanding.  Diluted  earnings  (loss) per common  share is computed  using the
weighted  average number of common shares  outstanding  and the dilutive  common
stock  equivalents  (using the treasury  stock method for warrants and options).
Summarized below is the  reconciliation of basic and diluted earnings (loss) per
common  share for the three  months and the six months  ended March 31, 1998 and
1997 (in thousands except per common share amounts):

<TABLE>
<CAPTION>
                                                For the Three Months Ended               For the Six Months Ended
                                              -------------------------------        -------------------------------
                                              Net Income            Per Share        Net Income            Per Share
                                                  (Loss)   Shares      Amount            (Loss)   Shares      Amount
                                              ----------   ------   ---------        ----------   ------   ---------
<S>                                            <C>          <C>      <C>               <C>         <C>     <C>      
March 31, 1998:                                                                                                     
   Basic earnings (loss)                       $ (1,276)    6,992    $ (0.18)          $ (3,654)   6,966    $ (0.52)
     Effect of outstanding securities (a)-                                                                          
       Warrants and options                          --        --                            --       --            
       Convertible debt                              --        --                            --       --            
       Convertible preferred stock                   --        --                            --       --            
                                               --------     -----                      --------    -----            
   Diluted earnings (loss)                     $ (1,276)    6,992    $ (0.18)          $ (3,654)   6,966    $ (0.52)
                                               --------     -----                      --------    -----            
                                                                                                                    
March 31, 1997:                                                                                                     
   Basic earnings                              $    283     6,580    $  0.04           $    538    6,567    $  0.08 
     Effect of outstanding securities (b)-                                                                          
       Warrants and options                          --       351                            --      297            
       Convertible debt                              --        --                            --       --            
       Convertible preferred stock                   --        --                            --       --            
                                               --------     -----                      --------    -----            
   Diluted earnings                            $    283     6,931    $  0.04           $    538    6,864    $  0.08 
                                               --------     -----                      --------    -----            
<FN>                                                                                                                
                                                                                                                    
(a)  As  the  Company  had  a  net  loss,  the   outstanding   securities   were
     antidilutive. 
(b)  The remaining outstanding securities were antidilutive.
</FN>
</TABLE>


Item 2. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

General

This  Form 10-Q  contains  forward-looking  statements  that  involve  risks and
uncertainties.  The actual results of SoftNet Systems, Inc. and its subsidiaries
could differ significantly from those set forth herein. Factors that could cause
or  contribute  to such  differences  include,  but are not  limited  to,  those
discussed in "Risk Factors" as set forth in the Company's  annual report on Form
10-K for the fiscal year ended  September 30, 1997, as filed with the Securities
and Exchange Commission,  and "Management's Discussion and Analysis of Financial
Condition and Results of  Operations"  as well as those  discussed  elsewhere in
this Quarterly Report. Statements contained herein that are not historical facts
are  forward-looking  statements  that are subject to the safe harbor created by
the Private Securities  Litigation Reform Act of 1995. Words such as "believes",
"anticipates",  "expects",  "intends"  and similar  expressions  are intended to
identify  forward-looking  statements,  but  are  not  the  exclusive  means  of
identifying  such  statements.  A number of  important  factors  could cause the
Company's  actual results for fiscal 1998 and beyond to differ  materially  from
past results and those expressed in any  forward-looking  statements made by, or
on behalf of, the  Company.  These  factors  include,  without  limitation,  the
following:   limited   operating   history;   lack  of  profitable   operations;
fluctuations in quarterly results; lack of backlog;  rapid technological change;
dependence  on new products;  dependence on the Internet;  ability to expand the
Internet  business;  risks associated with  acquisitions;  and competition.  The
Company  undertakes  no  obligation  to  release  publicly  the  results  of any
revisions to these forward-looking statements that may be made to reflect events
or  circumstances  after  the  date  hereof  or to  reflect  the  occurrence  of
unanticipated events.



<PAGE>


The Company's fiscal year ends September 30 and the second quarter of the fiscal
year ends March 31.  "Fiscal 1998" refers to the twelve months ending  September
30, 1998 with similar  references to other twelve month periods ending September
30.

Results of operations for the Second Quarter of Fiscal 1998 compared to the same
period in Fiscal 1997

Consolidated  net sales  decreased  $1.4 million (or 14.0%) for the three months
ended March 31,  1998,  as  compared  to the same  period in 1997.  Sales in the
document  management  segment  decreased $1.3 million (or 24.6%), as compared to
the same  period in 1997,  primarily  as a result of a  decrease  in the sale of
computer output microfiche  equipment ("COM").  Sales in the  telecommunications
segment  decreased  $52,000  (1.2%) when  compared  to the prior year.  However,
tele-communication sales for the same period in the prior year included revenues
of $255,000 from the Company's Chicago-based telecommunications group, which was
dissolved  on  December  31,  1997 as part of the  Company's  consolidation  and
relocation of all of its Chicago-based operations.

Consolidated gross profit decreased $1.2 million in the three months ended March
31, 1998, with profit margins decreasing to 32.1% from 39.1% for the same period
in 1997.  The  percentage  decrease is primarily  related to the decrease in the
document  management  segment's COM sales, which contributes the highest product
profit  margins.  As such,  profit  margins in the document  management  segment
decreased  for the three  months ended March 31, 1998 to 35.6% from 44.7% in the
same period in 1997. Gross profit decreased  $130,000 in the  telecommunications
segment for the three  months  ended March 31,  1998,  primarily  as a result of
additional  expense  associated  with  subcontracted   labor  used  at  specific
installations  during  the  quarter.  Gross  profit  decreased  $102,000  in the
internet  segment for the three  months  ended March 31,  1998,  primarily  as a
result of a reclassification  of certain web development  expenses being charged
entirely to cost of goods sold,  as well as additional  expenses  related to the
expansion of the segment's  technical  support  staff.  Similar web  development
expenses  in  prior  year  presentations  have  not  been  reclassified,  due to
immateriality.

Operating expenses (selling, engineering,  general and administrative) increased
$425,000  to $3.5  million for the three  months  ended March 31, 1998 from $3.0
million  for the same period in 1997.  The  increase  in  operating  expenses is
primarily the result of an increase in the  administrative,  sales and marketing
efforts of the Company's internet segment. Operating expenses increased $320,000
for the internet  segment for the three months ended March 31, 1998, as compared
to the same period in 1997.  In  addition,  the Company  recorded  approximately
$100,000 for legal and other  professional fees associated with the registration
of certain  securities of the Company in the second quarter ended March 31, 1998
(See Part II, Item 5).

The Company made no provision  for income taxes for the three months ended March
31, 1998, as a result of the Company's net operating loss carry-forward.

Consolidated  interest expense  decreased $52,000 (or 16.3%) to $268,000 for the
three  months  ended March 31, 1998  compared to $320,000 for the same period in
1997.  The  decrease  in  interest  expense  was the  result of the sale of $5.0
million of Convertible  Preferred shares on December 31, 1997 and the subsequent
use of the net proceeds to reduce the level of outstanding  indebtedness  on the
Company's line of credit facility in the second quarter of fiscal 1998.

For the second quarter of fiscal 1998, the Company had a net loss  applicable to
common shares of $1.3 million,  or a basic loss per share of $0.18,  compared to
net income of $283,000 in fiscal 1997, or basic earnings per share of $0.04.

Results of  operations  for the first Six Months of Fiscal 1998  compared to the
same period in Fiscal 1997

Consolidated  net sales  decreased  $5.3  million  (or 25.4%) for the six months
ended March 31,  1998,  as  compared  to the same  period in 1997.  Sales in the
document  management  segment decreased $4.1 million (or 38.0%),  primarily as a
result  of a  decrease  in the  sale of  computer  output  microfiche  equipment
("COM").  COM sales were  affected in the first quarter of this year by the fact
that the document  management  segment entered the year with an order backlog of
$1.4 million,  as compared to a backlog of $3.4 million entering the prior year.
However,  sales in the document management segment increased $1.3 million in the
current  quarter as compared to the  previous  quarter of this same fiscal year.
Sales in the  telecommunications  segment  decreased  by $1.2  million  (12.8%),
primarily as the result of fewer  healthcare and major system  installations  by
both the  Milwaukee  and Chicago  divisions  in the first  quarter of this year.
However,  telecommunication  sales  for the six  months  ended  March  31,  1997
included revenues of $148,000 from the Company's

<PAGE>


wholly-owned  subsidiary,  Communicate Direct Inc. ("CDI"), which was completely
dissolved  by the Company in fiscal 1997,  as well as revenues of over  $600,000
from the Company's Chicago-based telecommunications group which was dissolved in
December 1997.

Consolidated  gross profit  decreased $3.5 million in the six months ended March
31, 1998, with profit margins decreasing to 29.3% from 38.7% for the same period
in 1997.  The  percentage  decrease is primarily  related to the decrease in the
document  management  segment's COM sales,  which contribute the highest product
profit  margins.  As such,  profit  margins in the document  management  segment
decreased  for the six months  ended  March 31,  1998 to 31.2% from 45.3% in the
same period in 1997. Gross profit decreased  $550,000 in the  telecommunications
segment for the six months ended March 31, 1998,  as compared to the same period
in 1997.  Profit  margins  decreased  to 30.9% from 32.7% for the same period in
1997. Gross profits in the  telecommunications  segment for the six months ended
March 31, 1997 included  $35,000 from the operations of CDI, as well as $210,000
from the operations of the Chicago-based telecommunications group, both of which
were  subsequently  dissolved.  Gross profit decreased  $207,000 in the internet
segment for the six months  ended  March 31,  1998,  primarily  as a result of a
reclassification  of certain web development  expenses being charged entirely to
cost of goods sold, as well as additional  expenses  related to the expansion of
the segment's technical support staff. Similar web development expenses in prior
year presentations have not been reclassified, due to immateriality.

Operating expenses (selling, engineering,  general and administrative) increased
$746,000  to $7.0  million  for the six months  ended  March 31,  1998 from $6.3
million  for the same period in 1997.  The  increase  in  operating  expenses is
partially the result of the  consolidation  and  relocation of the Chicago based
operations to the Company's existing headquarters in Mountain View,  California.
These  activities  resulted in the one time write-off of leasehold  improvements
and moving expenses of $240,000.  In addition,  operating  expenses increased in
the internet  segment by over  $480,000 for the six months ended March 31, 1998,
primarily as the result of an increase in the  segment's  administrative,  sales
and marketing efforts.

Amortization  expense decreased $17,000 for the six months ended March 31, 1998,
to $691,000 as compared to $708,000 for the same period in 1997.

The Company  made no  provision  for income taxes for the six months ended March
31, 1997, as a result of the Company's net operating loss carry-forward.

Consolidated  interest expense  increased  $20,000 (or 3.5%) to $596,000 for the
six months  ended  March 31, 1998  compared  to $576,000  for the same period in
1997.

For the first six months of fiscal 1998,  the Company had a net loss  applicable
to common stock of $3.7 million,  or a basic loss per share of $0.52 compared to
net income of $538,000 in fiscal 1997, or basic earnings per share of $0.08.


Liquidity and Capital Resources

At March 31,  1998,  the  Company's  current  ratio  was 1.36 to 1 with  working
capital of $3.5  million.  This  compares  with a current ratio of 1.12 to 1 and
working capital of $1.3 million at September 30, 1997.

For the first six months of fiscal 1998, cash flows used by operating activities
were $2.9  million  compared to $1.6 million for the same period in fiscal 1997.
Cash flows used by investing  activities  were $303,000 for the first six months
of fiscal 1998 compared to $1.0 million for the same period in fiscal 1997. Cash
flows  provided  by  financing  activities  were $3.2  million for the first six
months of fiscal  1998  compared  to $2.3  million for the same period in fiscal
1997.

On December  31,  1997,  the Company  sold $5 million of  Convertible  Preferred
stock.  On January 2, 1998,  the net  proceeds of this sale of $4.6 million were
used to reduce the  balance  of the bank  revolving  credit  note (See Note 3 of
Notes  to   Condensed   Consolidated   Financial   Statements   for   additional
information).

The Company expects to be able to finance its working capital  requirements  and
capital expenditures for its document management and telecommunications segments
from its operating income and existing line-of-credit  facilities for the fiscal
year ending September 30, 1998.  However,  the Company is currently  considering
various product offering  expansion plans with respect to its Internet  segment,
for which it will need to pursue additional financing.

Other - Year 2000 Issue

Many existing  computer  systems and related  software  applications,  and other
control devices, use only two digits to identify a year in a date field, without
considering  the impact of the  upcoming  change in the century.  Such  systems,
applications  and/or  devices  could  fail or create  erroneous  results  unless
corrected so that they can process  data  related to the Year 2000.  The Company
relies on such  computer  systems,  applications  and devices in  operating  and
monitoring all major aspects of its business, including, but not limited to, its
financial  systems  (such  as  general  ledger,  accounts  payable  and  payroll
modules), customer services, internal networks and telecommunications equipment,
and end  products.  The Company also relies,  directly  and  indirectly,  on the
external  systems  of  various  independent  business  enterprises,  such as its
customers,  suppliers,  creditors, financial organizations,  and of governments,
both  domestically and  internationally,  for the accurate  exchange of data and
related information.

The Company is currently in the process of evaluating  the  potential  impact of
the  Year  2000  issue on its  business  and the  related  expenses  that  would
foreseeably be incurred in attempting to remedy such impact  (including  testing
and  implementation of remedial action).  Management's  current estimate is that
the costs associated with the Year 2000 issue should not have a material adverse
affect on the results of operations or financial  position of the Company in any
given  year.  However,  despite the  Company's  efforts to address the Year 2000
impact  on its  internal  systems,  the  Company  is not sure  that it has fully
identified  such  impact or that it can  resolve  it without  disruption  of its
business and without incurring significant  expenses.  In addition,  even if the
internal  systems of the  Company are not  materially  affected by the Year 2000
issue,  the  Company  could be  affected  as a result of any  disruption  in the
operation  of  the  various  third-party  enterprises  with  which  the  Company
interacts.



<PAGE>


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.  Not applicable.

Item 2.  Changes in Securities.


         On December  31,  1997,  the Company  issued  5,000  shares of Series A
         Convertible Preferred Stock, $0.01 par value, ("Convertible Preferred")
         and warrants to purchase 150,000 shares of common stock, exercisable at
         $7.95 per share and expiring on December 31, 2001 ("RGC Warrants"),  to
         RGC International Investors, LDC, for an aggregate purchase price of $5
         million. The sale of the Convertible Preferred and the RGC Warrants was
         arranged by Shoreline Pacific Institutional  Finance, the Institutional
         Division of Financial  West Group,  who received a fee of $250,000 plus
         warrants to purchase  20,000  shares of common  stock,  exercisable  at
         $6.625 per share and expiring on December 31, 2000.


         Each share of Convertible  Preferred is  convertible,  at the option of
         the holder, into the number of shares of common stock as defined by the
         stated value of the Convertible  Preferred  multiplied by 5% per annum,
         less any dividends paid,  divided by the conversion  price.  The stated
         value  of the  Convertible  Preferred  is  $1,000  per  share  and  the
         conversion  price is the  lower of  $8.28 or a two day  average  market
         price  within a 20 day  trading  period  prior to the  conversion.  All
         outstanding shares of Convertible  Preferred  automatically  convert to
         common stock on December 31, 2000.  Depending on market  conditions  at
         the time of  conversion,  the number of common  shares  issuable  could
         prove to be  significantly  greater in the event of a  decrease  in the
         trading  price of the common  stock.  Purchasers  of common stock could
         therefore  experience  substantial  dilution  upon  conversion  of  the
         Convertible  Preferred  (See Note 3 of Notes to Condensed  Consolidated
         Financial Statements).


         During the quarter ended  December 31, 1997,  the Company issued 48,780
         shares of common  stock  pursuant  to the  conversion  of  $200,000  of
         convertible  debt by a single holder of the  Company's 10%  convertible
         subordinated  notes due  October  31,  1999.  These  10%  notes  have a
         conversion price of $4.10 per share.  Additionally,  the Company issued
         1,120 shares of common stock  pursuant to the  conversion  of $7,560 of
         convertible  debt by a single  holder of the  Company's 9%  convertible
         subordinated  notes  due  September  15,  2000.  These 9% notes  have a
         conversion price of $6.75 per share.  These shares were issued pursuant
         to an exemption under Section 3(a)(9) of the Securities Act.

         During the quarter  ended  December  31,  1997,  the  Company  issued a
         combined  total of  64,000  shares of  common  stock to three  separate
         warrant holders,  upon the exercise of outstanding  warrants  (exercise
         price of $1.75 per  share).  These  shares  were  issued in a nonpublic
         offering  pursuant to transactions  exempt under Section 3(a)(9) of the
         Securities Act of 1933, as amended.

         On January 2, 1998, the Company issued  $1,443,750  principal amount of
         its 5% Convertible  Subordinated Debentures due September 30, 2002 to a
         single  investor in exchange for cash and the assignment to the Company
         of certain equipment leases. The Debentures were issued without the use
         of underwriters in a transaction exempt from registration under Section
         4(2) of the Securities Act of 1933, as amended.  The investor  acquired
         the securities for investment and without a view to  distribution.  The
         debentures are convertible  into Common Stock of the Company,  at $8.25
         per share, after December 31, 1998.

         During  the  quarter  ended  March 31,  1998,  the  Company  declared a
         dividend  on its  outstanding  Series A  Convertible  Preferred  Stock,
         payable  on March 31,  1998 to  stockholders  of record at the close of
         business on March 27, 1998.  The  dividend,  payable at the rate of 5%,
         was paid at the Company's option in the form of 62.5 additional  shares
         of the Company's  Series A Convertible  Preferred  Stock (See Note 3 of
         Notes to Condensed Consolidated Financial Statements).

         During the quarter ended March 31, 1998,  the Company issued 373 shares
         of common stock  pursuant to the  conversion  of $2,520 of  convertible
         debt by a single  holder of the Company's 9%  convertible  subordinated
         notes due September 15, 2000. These 9% notes have a conversion price of
         $6.75 per share.  These  shares  were issued  pursuant to an  exemption
         under Section 3(a)(9) of the Securities Act.

         Also during the  quarter  ended March 31,  1998,  the Company  issued a
         combined  total of  30,000  shares  of  common  stock to four  separate
         warrant holders,  upon the exercise of outstanding  warrants  (exercise
         price of $1.75 per  share).  These  shares  were  issued in a nonpublic
         offering  pursuant to transactions  exempt under Section 3(a)(9) of the
         Securities Act of 1933, as amended.

         Subsequent  to the quarter ended March 31, 1998,  the Company  issued a
         combined  total of  299,946  shares of common  stock,  pursuant  to the
         conversion  of  2,000  shares  of the  Company's  outstanding  Series A
         Convertible  Preferred Stock. The Series A Convertible Preferred Stock,
         including  accrued  dividends,  was converted into common shares at the
         conversion price of $6.69 per share.  These shares were issued pursuant
         to an exemption under Section 3(a)(9) of the Securities Act.

         In  addition,  subsequent  to the  quarter  ended March 31,  1998,  the
         Company   issued  120,000  shares  of  common  stock  pursuant  to  the
         conversion  of $810,000 of  convertible  debt by a single holder of the
         Company's 9%  convertible  subordinated  notes due  September 15, 2000.
         These 9% notes have a conversion price of $6.75 per share. These shares
         were  issued  pursuant to an  exemption  under  Section  3(a)(9) of the
         Securities Act.

Item 3.  Defaults upon Senior Securities.  Not applicable.

Item 4.  Submission of Matters to a Vote of Security Holders.

         At the Annual  Meeting of the  Shareholders  held on February 26, 1998,
         the following matter was adopted:

         1. The  election of a Board of  Directors to hold office until the next
         annual meeting of shareholders  and until their  successors are elected
         and qualified.
                                                         Number of Votes
                                                      For             Withheld
             
             Ronald I. Simon                        5,219,410           23,070
             Ian B. Aaron                           5,219,910           22,570
             Edward A. Bennett                      5,219,010           23,470
             Lawrence B. Brilliant                  5,219,010           23,470
             John G. Hamm                           5,219,510           22,970
             A. J. R. Oosthuizen                    5,219,910           22,570
             
         On  April  24,  1998,  the  Company  filed  a Form  8-K  reporting  the
         resignation  of Mr.  A.J.R.  Oosthuizen  as a Director of the  Company,
         effective as of April 4, 1998.

Item 5.  Other Information.

         On  January  30,  1998,  the  Company  filed  a Form  S-3  Registration
         Statement under the Securities Act of 1933 registering the resale of up
         to 2,697,320 shares of the Company's Common Stock, previously issued or
         issuable upon the exercise of outstanding  stock purchase  warrants and
         the conversion of the Company's  Series A Convertible  Preferred  Stock
         (See Note 3 of Notes to Condensed  Consolidated  Financial Statements).
         This registration was declared effective on February 13, 1998.

         On  February  4,  1998,  the  Company  filed  a Form  S-8  Registration
         Statement under the Securities Act of 1933 registering 1,525,952 shares
         of the Company's Common Stock issuable under both the Company's Amended
         1995 Long Term Incentive  Plan and the Company's  Employee Stock Option
         Plan.

Item 6.  Exhibits and Reports on Form 8-K.

     (a) Exhibits

         Exhibit 27 - Financial Data Schedule

     (b) Reports on Form 8-K

         On  January  12,  1998,  the  Company  filed a Form 8-K  reporting  the
         designation  and  issuance  of 5,000  shares  of  Series A  Convertible
         Preferred  Stock  (See  Note  3  of  Notes  to  Condensed  Consolidated
         Financial  Statements).  On February 12, 1998, the Company filed a Form
         8-K reporting the description of the Company's  capital stock. On April
         24, 1998, the Company filed a Form 8-K reporting the resignation of Mr.
         A.J.R.  Oosthuizen as President,  CEO and as a Director of the Company,
         effective as of April 4, 1998.



<PAGE>




SIGNATURES



In accordance with the requirements of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

SOFTNET SYSTEMS, INC.



/s/ Garrett J. Girvan
-------------------------------------
Garrett J. Girvan
Chief Operating Officer and Chief Financial Officer



/s/ Mark A. Phillips
-------------------------------------
Mark A. Phillips
Principal Accounting Officer


Dated:  May 15, 1998